Interestingly, if he makes this election in the future, he can elect to treat the condo as his principal residence for up to four years before he moved into it, which may wipe out all but one year of taxation divided by the total years you all own the property.
Does an owner pay capital gains tax for moving into a rental property?
It depends on the steps taken. Liljana, I think your son can make a 45(3) election in the future. Although you and your husband could as well, it may lead to more tax later on your home. You might need to pay some capital gains tax now on the condo’s change in use to personal use. You might also need to pay more tax later on the subsequent appreciation as well from the time your son moved into it to the time you transfer it to him or sell it, or upon the second death of you and your husband. This appreciation will also be taxable, assuming you want to preserve your principal residence exemption for your house.
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You can claim a property that your child lives in as your principal residence if it is legally or beneficially yours. But this has tax implications for your own home.
Ask MoneySense
I bought a condo in 2006 in another province for my daughter to live in. It’s registered in my name. I also have a house in another province. I am planning to sell the condo my daughter lives in very soon. Can I claim capital gain exemption in the condo she lived in all these years?
—Bill
Capital gains tax when selling a home your child lives in
Canadian taxpayers may be eligible to claim the principal residence exemption when they sell real estate. Since 2016, real estate transactions have been under more scrutiny with the Canada Revenue Agency (CRA) since taxpayers now need to report all sales on their tax returns, even if the sale is of a tax-free principal residence.
The definition of principal residence for tax purposes
According to the CRA, in order for a property to qualify as a principal residence, it must be:
- A housing unit, which can include a house, a condo, a cottage, a mobile home, a trailer, a houseboat, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation;
- Owned by the taxpayer, jointly or otherwise, legally or beneficially;
- Ordinarily inhabited in the year by the taxpayer, their spouse or common-law partner, their former spouse or former common-law partner, or child.
There can be nuances in the principal residence guidelines that may impact your ability to qualify for the exemption. Some examples are if your home was rented out or used for business purposes, if the acreage is significant, or if you owned another property during the same years that you owned the property in question and claimed the principal residence exemption for it.
Legal versus beneficial ownership of a property
An important nuance for you, Bill, is whether your daughter beneficially owned the property. If she did—meaning you were on title, but it was technically hers—she may be able to claim the principal residence exemption herself. This could be the case if she paid all of the ongoing expenses, amongst other criteria. But then the question may be where did the down payment come from, and if the property was in fact beneficially your daughter’s, but legally in your name, why did the two of you not put it in her name in the first place?